Oct 5, 2023
Digital Real Estate: A Deep Dive Into Online Business Acquisitions
"Digital Real Estate: A Deep Dive Into Online Business Acquisitions" explores the world of online business acquisitions, highlighting their strategic significance. Online business acquisitions are akin to investing in digital real estate, offering opportunities for financial independence, global market access, and passive income.
Understanding digital real estate involves recognizing the value of websites, e-commerce stores, and content platforms as revenue generators and innovation hubs.
Investing in online businesses provides flexibility, global reach, and asset building potential.
Different types of acquisitions are explained, such as horizontal, vertical, congeneric, and conglomerate.
The blog also covers due diligence when evaluating online businesses, including web traffic, financials, competition, client base, brand value, market share, and reputation.
Projections for the future are vital and involve considering multipliers, scalability, growth rates, limiting factors, and potential disruptions.
Navigating the online business marketplace is explored, including publicly traded and private companies, and small businesses for sale.
The acquisition process is detailed, comprising pre-acquisition, acquisition, and post-acquisition phases, with due diligence, target selection, and integration as crucial elements.
Strategies for successful business ownership are discussed, emphasizing value investing, seizing opportunities during low valuations, and long-term holding.
Finally, building a digital portfolio is highlighted, emphasizing diversification and ongoing evaluation, and readers are encouraged to join the digital community for insights, tips, and industry trends."
Introduction to Online Business Acquisitions
Welcome to bshko's roadmap of Online Business Acquisitions. Throughout this blog, we'll dive into the domain of digital real estate and uncover why investing in online businesses isn't merely prudent but a calculated and strategic decision.
Global mergers and acquisitions (M&A) activity surpassed $3.4 trillion in 2021. A merger happens when two companies combine to form one new company. An acquisition occurs when one company buys a controlling ownership interest in another company. Online business acquisitions, such as website acquisition, are a popular way to expand ownership of digital real estate, but there are various forms of digital real estate.
Understanding Digital Real Estate
Digital real estate encompasses websites, e-commerce stores, content platforms, and more. These online properties hold the power to generate revenue, attract audiences, and provide a platform for innovation and success.
In the dynamic landscape of the digital age, online businesses are like valuable plots of land in the virtual world. Think of them as pieces of digital real estate, each with its unique potential for growth and prosperity. Understanding this concept is your first step towards becoming a savvy online business investor.
Why Invest in Online Businesses?
You might wonder, "Why invest in online businesses?" The short answer: incredible opportunities presented by the digital age.
It’s not hard to find sound evidence that supports the claim that online business acquisitions offer a gateway to financial independence, entrepreneurial freedom, and a way to construct a life of passive income.
Investing in online businesses is more than a financial decision; it's an investment in your future. These ventures provide the flexibility to work from anywhere, tap into global markets, and build assets with substantial potential for returns.
The Growth of Online Business Acquisitions
Online business acquisitions have been on a remarkable growth trajectory in recent years. As the digital economy continues to expand, the opportunities for acquiring and scaling online businesses have multiplied. This trend reflects a fundamental shift in the way entrepreneurs and investors view digital assets.
The motivation for acquiring online ventures takes various forms depending on the goal of the outcome.
Buying Online Businesses
Here are some of the powerful motivations for business buying strategies used to expand a portfolio of online property investments.
- Market Expansion: Buying an operating company may be the fastest and easiest way for a company to enter a new market.
- Growth: It may be more economical to buy a company for its established customer base than to acquire new customers on its own. When a company tries to grow market share, customer acquisition costs to capture new customers may be higher than the price per existing customer, when buying another company.
- Reduce Competition: Industry consolidation through acquisition is a strategy used to buy out competition. This strategy may reduce oversupply and allow price increases for better gross margins.
- Innovative Technology: A larger or well-funded company may buy a company to gain access to critical technology that is the intellectual property of the company being acquired.
- Improve Financials: Some acquisitions are intended to help productivity, reduce costs, boost profit margins, improve cash flow, increase revenues, and earn higher profits.
- Increase Stock Value: An acquisition strategy may include buying a company to increase the shareholder value of the purchasing company. If the companies are publicly traded, whether this happens or not, depends on investor sentiment and market conditions.
Digital Asset Acquisition Types
Acquisitions are also defined by their type, which includes the following:
- Horizontal: Buying a company that offers similar products or services. Example: Facebook bought Instagram for $1 billion in 2012.
- Vertical: Buying a company in the supply chain. Example: Amazon bought Whole Foods for $13.7 billion in 2017.
- Congeneric: Buying a company offering different products and services to the same customer base. Example: Verizon bought Yahoo! for $4.8 billion in 2016.
- Conglomerate: Buying a company in another industry sector. Example: Microsoft bought LinkedIn for $26.2 billion in 2016.
With this understanding of acquisition strategies, the next step is to identify profitable online businesses that are acquisition candidates.
The Art of Identifying Profitable Online Businesses
There are two steps for analyzing online business ownership. The first is actual and concerns the financial results over the past three years. The second is projected for the next three to five years.
#1 — Evaluation of Existing Operations
It is important to conduct due diligence in buying online businesses to determine the strengths and weaknesses of their ongoing operations.
Here is a list of items for due diligence:
- Web Traffic: Confirm the web traffic by scrutinizing reports from Google Analytics and key performance metrics.
- Financials: Review the income statement and balance sheet for the past three years. Look for gross revenues, expenses, profit margins, owner’s salary, net income, and earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Competition: Conduct a competitive analysis to discover the strengths and weaknesses of the competition.
- Client Base: Consider the customer acquisition cost, the churn rate (loss of customers), repeat customers, and estimates of the lifetime value of each customer.
- Brand Value: Assess the brand recognition and visibility in a particular sector.
- Market Share: Determine market share and analyze whether it is growing.
- Reputation: Check reviews of customers and job reviews of workers. Search for complaints with the Better Business Bureau and Federal Trade Commission (FTC).
#2 — Projections for the Future
Projections are estimates based on factors that may impact the existing operation over the next three to five years.
Projections should consider the following factors:
- Multiplier: The return-on-investment (ROI) calculation includes an evaluation of the multiplier used on net income to calculate a business valuation.
- Scalability: Can the company scale up to grow revenues and profits?
- Growth Rate: Look for industry projections showing an attractive compound annual growth rate (CAGR) over the next five years, in the industry sector of the company to be acquired.
- Limiting Factors: What can thwart the company’s operations? Besides market dynamics, legal or regulatory issues may need consideration.
- Disruption: Artificial intelligence may disrupt most business processes over the next few years. This could be beneficial, harmful, or both.
The result of the analysis gives an evaluation of the existing operations and predictions of what the future value might be. Many companies will not pass this scrutiny and not offer sufficient ROI to be a viable acquisition candidate. Rather than acquire an inferior company, it helps to expand the search for better-qualified candidates.
Navigating the Online Business Marketplace
There are public marketplaces to search for acquisition targets and private marketplaces.
Publicly Traded Companies
Publicly traded businesses offer plenty of information about their operations. The stock market is the place where investors seek entrepreneurial investments. Investors may find some companies listed on the New York Stock Exchange and the American Stock Exchange; however, NASDAQ is the favored public online business marketplace.
The valuation of a business traded on a stock exchange is quoted in real-time based on the stock price multiplied by the number of outstanding shares to get a total market cap.
Conducting due diligence to determine a company’s value is a bit more challenging for private companies. Some information may be available on private equity reporting systems, such as PitchBook, GetLatka (for SaaS companies), and CBInsights.
It is possible to hire a consultant, such as Embark and others, to value a private company.
Often, the valuation of a private company is based on the last funding round and does not reflect any level of profitability.
Small Businesses for Sale
Small business owners may list their business for sale on popular websites such as BizBuySell.com, Bizquest.com, or Flippa.com. When hunting for a web property purchase, these websites have thousands of listings that include online businesses, profitable websites for sale, and potential E-commerce acquisitions.
After identifying a target company for acquisition, the next steps are about what to do when navigating the acquisition process.
The Acquisition Process Unveiled
There are three phases of the acquisition process: pre-acquisition, acquisition, and post-acquisition.
#1 — Pre-Acquisition Phase
There is significant work to be done in this phase. Conducting thorough due diligence is necessary to complete the acquisition at a reasonable price. The failure rate for completed acquisitions is around 70% to 90%. Failure means the deal was completed, but the acquisition did not increase the valuation of the company making the purchase, or the deal did not meet pre-determined goals.
Determining Strategic Fit
This high failure rate might be improved by paying more attention to the details and, with exceptional clarity, analyzing the strategic fit between the company being acquired and the potential buyer.
The strategic fit analysis can be applied proactively to create a target that is yet to be identified in the market. Some businesses may be available for sale. Others may entertain an offer, even when not actively looking to be acquired. The target selection relies heavily on the possibility of increased valuation by understanding the reasons for the acquisition, the contributions that the acquisition will create, and a market comparison with other similar companies.
The scope of due diligence needed is exhaustive. Many hire a consulting firm to do this work to have an unrelated third party’s opinion. It is important to know when to walk away from a transaction if the numbers are not right or serious problems arise. It is prudent to make a list of many things that may go wrong and have a strategy for risk mitigation for each possibility. Besides reviewing audited financials, estimate the value of soft assets for things like key employees.
#2 — Acquisition Phase
This part of the process solidifies the deal.
Bid Offer and Acceptance
Based on the rigorous analysis and a successful bid at a reasonable price that the seller accepts, it is time to complete the purchase/sale agreement. The best acquisition agreements are clear and well-articulated with all parties understanding the agreement.
After all the legal paperwork is done, the acquisition is made and announced—time to celebrate for a moment and then back to work.
#3 — Post-Acquisition Phase
Once an acquisition deal is done, there is time to consider potential integration and improvements that can be made during the transition.
Integration may be possible if the integrations support the goal of increased valuation. There may be productivity gains achieved from restructuring business processes. Alternatively, the companies may remain completely autonomous or a hybrid of both collaboration and independence.
Possible scenarios that could happen during a transition include business transfers from one company to the other and restructuring of organizational management. Success comes from the acquired company complimenting the parent’s business strategy and contributing to its overall performance.
Strategies for Successful Business Ownership
One of the best examples of a long-term acquisition strategy for successful business ownership is the massive wealth building achieved by Warren Buffett with Berkshire Hathaway.
Warren took seed capital of $10,000 in the 1950s and turned it into over $88 billion with the help of Charlie Munger. The two best friends and investors pride themselves on being value investors with a very straight-forward investment philosophy, which is:
- Invest in what you know.
- Hunt for the few opportunities to buy the best-run companies that consistently produce great returns.
- Buy the company when some temporary adverse condition causes it to have a low valuation.
- Buy as much of the company as possible (preferred 100%).
- Keep the highly skilled management in place and give them the support needed (usually money) to overcome problems and let them run the company.
- Hold the investment for a long time, maybe forever.
The strategy of Berkshire Hathaway is to know what price the acquisition deal can be done to produce value for its owners and hold out for that price.
This is a proven formula for business ownership. Owning a business is not the same as running one. This wealth-building strategy focuses on acquiring companies.
Conclusion: Building Your Digital Portfolio
By now, you've explored the intricacies of this dynamic marketplace, learned how to identify profitable ventures, and mastered the art of navigating acquisitions. But your journey is far from over.
Now, it's time to review your digital portfolio. Just as a traditional real estate investor would assess their properties, you should periodically evaluate the online businesses you own. Are they still performing well? Are there opportunities for improvement or expansion? By regularly reviewing your digital assets, you can ensure they continue to be valuable additions to your portfolio.
Diversifying Your Investments
As the saying goes, don't put all your eggs in one basket. Diversification is a key strategy for long-term success in online business acquisitions. In this section, we'll delve into the importance of diversifying your investments.
By acquiring businesses in different niches or industries, you spread your risk and increase your chances of consistent returns. We'll explore how to identify complementary acquisitions and manage a diverse portfolio effectively. Diversification isn't just about mitigating risk; it's also about seizing new opportunities and expanding your digital empire.
Long-Term Success in Online Business
In the world of online business acquisitions, it's not just about the quick win; it's about long-term success. In this part of our journey, we'll delve into the strategies and practices that can help you achieve lasting prosperity.
Long-term success is about creating a sustainable digital ecosystem that thrives for years to come.
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